“Our primary strategy is to move clients abroad, where
there are more stocks and better opportunities,” Radek Neumann,
chief stock trader at Komercni Banka AS, owned by Societe
Generale SA (GLE), said in a July 19 interview. “The lack of
liquidity, a weak economy and the fact that Czech companies have
no growth stories means investors are moving elsewhere.”

Prague’s PX index slid 13 percent this year, the sixth-biggest drop among 94 indexes tracked by Bloomberg and trailing
only the Cypriot stock gauge’s 19 percent drop in Europe. Share
turnover fell 36 percent in the first six months from a year
earlier to 3.4 billion euros ($4.5 billion), data from the
Federating of European Securities Exchanges, or FESE, shows. In
Germany, volumes shrank 4.1 percent to 513.8 billion euros while
in Poland they rose 16 percent to 26.8 billion euros.

The Czech bourse, which traded thousands of stocks in the
1990s when the government sold stakes in companies following the
fall of communism, now lists 25 companies, including 13 on its
main index. Prague has hosted one initial public offering since
2008, compared with 116 new listings on the Warsaw Stock
Exchange. Six straight quarters of shrinking economic output,
plans by the largest party in parliament to raise taxes for big
companies and a new trading platform which has limited liquidity
all have damped appeal for the market, Neumann said.

Market Makers

Volumes in Prague extended a five-year slump after the
exchange moved trading in November to the Xetra platform from
the previous SPAD system. The bourse, a member of Wiener Boerse
AG’s CEE Stock Exchange Group along with markets in Austria,
Hungary and Slovenia, said the switch was designed to ease
access for foreign investors and allow Czech brokerages to trade
in countries using the same software, including Germany.

Rather than boosting volumes, Xetra has fragmented trading
into smaller transactions and curbed the role of market makers,
or brokers obliged to maintain liquidity, according to Neumann.
The bank’s clients now make about 40 percent of stock purchases
abroad, up from about 5 percent in 2007, he said.

“The drop in volumes has been magnified by the switch to
Xetra,” said Neumann. “SPAD was optimal for institutional
investors as they were certain to trade the needed amount of
securities within a few moments. There is currently no such
certainty and the Czech market has become a domain of small
investors, while the large ones have been moving elsewhere.”

Size, Liquidity

The size and liquidity of markets in France, Germany and
the U.S. allow investors to be more “creative,” Neumann said.

Prague-based Komercni Banka, one of two banks listed on the
PX index, has dropped 8.1 percent this year, reducing its market
value to 140 billion koruna ($7.2 billion). The lender is the
third-largest in the Czech Republic by assets after the local
units of KBC Groep NV (KBC) and Erste Group Bank AG.

Jiri Kovarik, the spokesman for the Prague Stock Exchange,
said the European Union’s debt and economic crisis is a bigger
factor for investors than the Xetra system.

“We don’t believe the drop in volumes is caused by our new
trading system,” Kovarik said by phone on July 24.

Czech shares are cheaper than Polish equities, with the PX
gauge trading at 11.8 times estimated earnings, compared with
12.5 times for Warsaw’s WIG20 index. CEZ AS, the biggest Czech
power producer, is the cheapest among 16 sector peers tracked by
Bloomberg after tumbling 32 percent this year to 463.5 koruna by
4:27 p.m. in Prague. The slump prompted ING Groep NV to raise
CEZ to buy from hold on July 1.

Warsaw Packed

“Attractive” dividends and valuation give CEZ room to
rebound, Stanislaw Ozga, an analyst at PKO Bank Polski SA in
Warsaw, wrote in an e-mail today. Ozga started covering CEZ on
June 28 with a buy rating and a price estimate of 509.4 koruna.

Companies from the EU’s post-communist nations have favored
listings in Warsaw, home to the biggest exchange, rather than
with the Vienna-led group. CEE Stock Exchange’s share turnover
dropped 80 percent in January to June from a peak in 2007,
compared with declines of 57 percent for Deutsche Boerse AG and
15.5 percent in Poland, FESE data show.

While listings fell to 28 from 31 in Prague and to 103 from
118 in Vienna between June 2007 and June 2013, the number of
companies traded in Poland surged to 888 from 301, surpassing
Germany with 731 stocks, FESE data show. The Belgian, Dutch,
French and Portuguese bourses, operated by NYSE Euronext, have a
combined 1,065 listings, little changed from six years earlier.

’Dreadful’ Volumes

“Czech volumes have been dreadful compared to Poland,
which is a much more dynamic market with constant listings,”
said John Milton, a director at Ipopema Securities SA that
trades shares in Warsaw, Prague and Budapest, in a phone
interview on July 23.

The Czech recession deepened in the first quarter as gross
domestic product contracted 1.3 percent from the previous three
months, the statistics office in Prague said on June 28.

A three-year fiscal-austerity program has cut government
and consumer spending, while the euro area’s debt crisis hurt
demand for Czech exports, which account for about 80 percent of
GDP, worsening the outlook for company profits. The economy will
grow 0.3 percent in this year and 1.6 percent in 2014, estimates
from the International Monetary Fund show.

CSOB Asset Management AS reduced holdings of Czech shares
in its emerging European equity fund to less than 17 percent in
June from 20.8 percent at the end of 2011, Pavel Kopecek, a fund
manager, said in e-mailed comments on July 23. The Prague-based
investment arm of KBC is the country’s third-biggest money
manager with 156 billion koruna ($7.9 billion) of assets.

The Czech Social Democrats, or CSSD, have pledged to raise
taxes on energy, financial and telecommunications companies to
30 percent from 19 percent and to scrap a law allowing taxpayers
to divert part of pension taxes to private accounts. CEZ touched
an eight-year low on July 17 as the stock’s selloff was boosted
by speculation the country may be heading toward early general
elections, which the CSSD would win, according to opinion polls.

“Local funds are looking at this and reducing positions,”
said Komercni Banka’s Neumann. “Investors from other countries
with a stronger free-market mindset see this as political
interference and don’t want to invest in this environment.”